A Lesson In Monetary Imprudence

June 2007 | Economic Analysis

The interest rate cuts ordered by Iranian President Mahmoud Ahmadinejad in May is akin to adding fuel to a raging fire and have led us to revise our inflation forecast up to 20.0% y-o-y for 2007. Indeed, the consumer price measure of inflation (CPI) came in at 17.6% y-o-y in January-February (the Iranian month of Bahman); a result of the president's spending splurge, the inflow of petro-dollars and rampant money supply growth - 39.4% y-o-y in 2006 according to the Central Bank of Iran. CPI was 6.5% y-o-y in the first month of the last Iranian calendar year, March-April, 2006 (Farvardin 1385). Producer price inflation has also followed a similar course, having more than doubled according to the latest figures, jumping from 6.4% y-o-y in March-April 2006, to 15.7% y-o-y in February-March (Esfand) this year. In addition to this, following years of delays, the decision to implement fuel subsidy cuts in May, raising retail prices by 25%- though Iranian gasoline prices remain one of the lowest in the world - will also contribute to the upward trajectory of prices throughout the economy. Estimates suggest around 10% of its oil export revenues were spent on importing gasoline last year. Further plans to ration gasoline, by forcing consumers to pay more for purchases above a set quota, have been delayed, and it is possible that this may prove far too unpalatable politically to implement in the near future.

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